BYD Stalled Despite Japanese Carmakers' Woes in China

The prognosis isn't looking good for Japanese car brands in China,
with Honda (Tokyo: 7267) becoming the latest
predictor that the gloom plaguing Japan's big 3 automakers could
last into next spring and perhaps even longer. That looks like bad
news for not only Honda, Toyota (Tokyo: 7203) and
Nissan (Tokyo: 7201), but also their Chinese joint
venture partners including Guangzhou Auto (HKEx:
2238) and Dongfeng Motor (HKEx: 489). Meantime,
former high-flying car maker BYD (OTC:BYDDY, HKEx:
1211; Shenzhen: 002594) also continues to sputter for its own
internal reasons, with the company predicting its profit will
continue to plunge for the rest of the year to almost zero.

Both of these stories aren't really new, as Japanese car makers
have seen their sales drop sharply since a territorial dispute
over a small island chain first flared between Beijing and Tokyo
in September. Meantime, BYD's woes date back even earlier, as the
company's sales have been plunging for much of the last 2 years
due to weakness plaguing its car business. In an alarming sign, it
looks like that weakness is also starting to infect BYD's older
and more stable battery unit as well.

Let's look first at the latest news from Honda, which quotes the
company saying its business in China may not return to normal
levels until February next year. (English article) Honda, which operates China
joint ventures with both Dongfeng and Guangzhou Auto, also said
the sharp drop in its China sales will cause it to miss its
full-year profit forecast by around 20 percent.

What's most interesting to me in this latest gloomy report is the
prediction that sales may not return to normal until February, as
that indicates the Japanese automakers are expecting the current
downturn to last longer than many people had expected. In fact, I
think even February could be an optimistic prediction and the
downturn could last well into the middle of next year, dealing a
big blow to both the Japanese brands and their Chinese partners.

Many Chinese may soon resume buying most Japanese products at
more normal levels by the end of the year as negative sentiment
from this diplomatic crisis starts to fade. But cars are likely to
suffer for a longer period due to the lingering images many
Chinese consumers have of Japanese brand cars being burned and
their owners beaten by angry crowds. Such fears are likely to
linger for a while, as many consumers could easily opt to buy a US
or European brand car over a Japanese one due to fears that they
or their car could become a victim of angry mobs if tensions ever
flare again.

Meanwhile, let's look briefly at BYD's latest results that show
the woes continue unabated at this former high-flyer backed by
billionaire investor Warren Buffett. BYD's profits slid 94 percent
in the third quarter to less than $1 million, and the company
forecast its profit for the full year would fall by an even bigger
98 percent. (results announcement; English article)

The company loves to talk about the big potential for its newer
electric car business, which it sees as its big future growth
engine and presumably was a big factor in Buffett's original
decision to buy 10 percent of BYD. But the reality is that its
core car business is hurting due to lack of exciting new products,
and its battery business is now also starting to feel the pains of
a slowdown.

I was somewhat amused by one report that said the company expects
to return to profit growth in 2013, since it's quite easy to show
growth after your profits have shriveled to almost nothing. Then
again, I wouldn't completely believe the forecast for return to
growth, as BYD could easily slip into the loss column as its
prolonged winter continues.

Bottom line: Japanese car brands and BYD are
both on the cusps of prolonged winters, as the former group
battles negative consumer sentiment and the latter deals with
declining businesses.

Doug Young has lived and worked in China for 15 years, much of
that as a journalist for Reuters, writing about publicly listed
Chinese companies. He currently lives in Shanghai where he
teaches financial journalism at a leading local university. He
also writes daily on his blog, Young’s China Business
Blog, commenting on the latest developments at
Chinese companies listed in the US, China and Hong Kong. He is
also the author of an upcoming book about the media in China, The
Party Line: How The Media Dictates Public Opinion in Modern
China.